WPP FY14 interims: Tightening cost management belies the upbeat market forecasts

WPP :   The group is tightening the screw on hiring and staff costs to absorb slowing net sales growth while maintaining the public forecasts of rising GDP and advertising expenditure into 2015. The hitherto growth engine markets of BRIC however, are looking increasingly wobbly, while the contraction in margins at the digitally heavy specialist communications division suggests pressure from rising talent costs on the groups core growth areas. For the present, markets are un-fazed as long as Draghi follows through with the QE rumours and groups such as WPP increasingly resort to share buy-backs and lower tax provisions to create the veneer of value enhancement for investors. While the current financial repression engineered by central banksters can make most share buy-ins look attractive by enhancing EPS, this is just another example of the misallocation of capital when companies are being encouraged to overpay for growth, even when it is their own.

Trading H1 FY14: FY14: Revenues +2.7% to £5,459m (WYT +1.6% to £5,413m) with net sales +4.1% organic (WYT +4.1%), -8.3% fx and +2.3% Acqs. By region, organic net sales increased by +4.3% from N.Am (RoS +30bps to 14.9%), +6.9% from UK (but with RoS -20bps to 13.7%), +0.6% from W.Europe (Ros +10bps to 9.3%) and +5.5% from RoW (but RoS -60bps to 13.1%). By category, organic revenue growth was +5.9% for Advertising & Media (margins however flat at 14.7%), +1.2% for Data Inv mgt (margins +10bpts to 10.5%), +2.7% for PR (margins +180bps to 15.0%) and +3.8% for Branding & Identity, Healthcare & Specialist Comms (margins down -100bps to 11.2% however). Net New Business was $4.089bn, which was slightly below our $4.39bn forecast.

Costs: Against constant currency revenue growth of +6.4%, constant current currency cost growth was held at +6.2%, ergo, the +30bps constant currency margin uplift reported (vs reported margins flat at 13.0%). Within this number, staff costs as a proportion of net revenues edged up from 66.5% to 66.6%, notwithstanding cuts in cash incentives (from £78m to £54m) and modest increase in like for like FTE numbers; +1.7% YoY to period end and +1.5% average for H1.

OUTLOOK FY14: Group FY14 guidance remains at >+3% for lfl net sales and +30bps (at constant fx) for EBITA margins. On a macro perspective, WPP did not re-iterate its previous (at Q1) FY14 global GDP growth estimate of +3.6% (+5.7% nominal), although it continues to forecast global advertising expenditure growth of +4.5% for 2014, rising to +5.0% in 2015. The latter year estimate, includes an improved level of expenditure across every major market with the exception of LatAm, where the drop-off in the estimated rate of growth to +8.7%, vs +10.1% for 2014, is still relatively benign. Clearly, all’s well in someone’s garden, albeit they ought to go easy on the weed!

In many ways, WPP is a microcosm of the broader market; a diminishing capacity to raise margins against a faltering top-line growth proposition and thereby having to resort to levering cheap capital to drive acquisitions and buy-backs in order to sustain the EPS growth mantra.  Perhaps, there are still some optimists out there that believe that “it’ll be better next year”, notwithstanding  this has been pushed out each year, only to see the growth forecast crumble.  But who really cares? Sovereign debt yields across southern Europe have little connection to those countries ability to pay, unless the EU really is the "transfer union" that Draghi says it's not and the Karlsruhe judgement ruled would be illegal. As long as central banks flood financial markets with liquidity and depress returns, the game is not whether WPP et al are misallocating capital by over-paying for lower growth, but whether equities as an asset class remains attractive (by default) and if WPP shares remain an efficient proxy for this.  Of course, the madness won’t last, but until currency markets restore discipline, it seems to be the only game in town.

The old fox learns a new trick - Murdoch walks away from Time Warner

Having seen the outrageous premium Murdoch paid for the WSJ, markets must have been salivating over how much he might now stump up for Time Warner. Surely, the $86ps ($80bn) offer was a mere opening shot and that the old boy could be bounced into perhaps three figures, or so the narrative went. Not to be lads! The 'old-boy' has done a runner and left the spivs holding their longs in TWX and without another putative bidder in sight, the bid premium could evaporate.

Perhaps this a cunning ploy to lower expectations and soften up the TWX management ahead of a future return for TWX? If it is, it would be a remarkably long term strategy for an 83 year old. Instead, one should follow the money. Having arranged a $7.5/$8bn cash release from selling Fox's European pay TV assets to BSkyB, initially to part fund the TWX offer, Murdoch is now proposing to spend the bulk of this ($6bn) on a share buy-back at Fox. If Murdoch was getting investor push-back on the prospective tidal wave of 'A' non-voting Fox shares that he would have to issue, even with the Sky cash, then a return for TWX, without the cash seems even less probable. As per my previous blogs on the subject, the Murdoch strategy is centered around retaining control while raising funds using cascading shareholdings and restricted voting shares.  Yes, he could always offer to issue voting shares, but is this really probable that he would risk his legacy to his children at this stage? No, he'd rather walk away. Perhaps an old fox can learn new tricks after all!



A reminder on TWX from the WYT Growth rater service

BMW Q2 results: three quarters of unit sales growth were from China!

What was that supposed Chinese curse - "May your wishes come true"?

Well for foreign auto manufacturers dreaming of rising Chinese sales to offset withering Latin American demand and possible interest rate rises this may not have seemed much like a curse. Without China, BMW's Q2 unit deliveries would have been up by a meagre +1.4%, notwithstanding the 16 model launches and previous year's heavy investments. The silver lining however has a black cloud. I'm not just referring to the increased reliance on a possibly slowing market, but the changing relationship between buyer and seller that inevitably arises as markets mature. Welcome to the world of the commercial shake-down. The US has been at it for a long time and with some spectacular foreign scalps taken recently such as the $9bn 'settlement' from BNP.  The Chinese however, seem to be learning fast as seen by some recent headlines from their "National Development and Reform Commission (NDRC). Having worked over a few big names in other sectors, the NDRC are now taking some pot-shots at the Auto segment with their anti-monopoly laws and are threatening to punish Audi and Chrysler.

Will it change the game? No, Auto manufacturers can't afford to be out of this market, but it will raise the cost of doing business there.



Comment on BMW from the WYT growth rater service:-

BMW: Market leader in the premium car segment with higher NPD expenditure sustaining record unit sales, albeit with a lagged delivery into margins. With 16 new models and model revisions being launched into this year, 2014 was always going to be a strong performer, particularly for an auto manufacturer in the premium segment, where aspirational Chinese accounted for 75% of Q2’s +27k/+5.3% increased unit sales.  As LatAm markets wither and Russian sanctions ratchet up however, this dependency on the Chinese buyer may not be entirely favourable. Not merely as Chinese growth levels off, but as Chinese authorities learn how to leverage market access into control and fees. If the US can charge/shake-down BNP for $9bn to retain access to its markets, then what price is access to Chinese consumers worth – see recent move against Audi (link below).

http://www.reuters.com/article/2014/08/06/us-china-autos-antitrust-investigation-idUSKBN0G604J20140806

Trading – Q2 FY14: Revenues +1.8%/+€353m (negative fx impact not disclosed) with EBIT +26%/+€537m on unit deliveries up +5.3%/+27k to 533k units and FTE’s +5.3% to 112.5k. Within these figures, Auto revenues advance by +1.7%/+€303m with Auto EBIT recovering by +23%/+€ 406m to €2,161m after last year declines in higher R&D charges (not disclosed in Q2).  By brand, BMW unit sales increased by 8.3% (to 458k units) with mini -10.4% (to 74k units) and Rolls Royce +28.6% (to 1.1k units). Motorcycles raised EBIT by +19.6%/+€9m to €55m on revenues +11.2%/+€53m while Financial services EBIT fell -1.9%/-€9m to €459m with group PBT rising +30.9% (to €2,660m) and EPS by +27.5% to €2.69.

OUTLOOK FY14:  Sharp rise in global sales volumes expected (to >2m units) benefitting from 16 new models and model revisions.  Auto EBIT margins are expected to be in 8-10% range (9.4% in FY13) and profits expected also to rise “significantly” albeit with the pace of EBIT growth expected to be “affected by high levels of expenditure for new technologies and by rising personnel expenses”.